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Tax accountant talks Dayton's proposed tax increases

Gov. Dayton's budget would raise state income taxes on Minnesota's wealthiest residents.

Michael Schaffer, a certified public accountant, discussed how the proposed tax increases would impact Minnesotans during an interview with All Things Considered on Wednesday.

Schaffer works for R.W. Ramsay & Associates, where he specializes in personal and corporate taxes.

Tom Crann: So, I want to parse this out. Who's facing a possible tax increase under Gov. Dayton's budget plan and how much?

Michael Schaffer: Well, the easiest answer is high income individuals, but that's actually a deceptively complex answer. Most of the people that will be looking at an increase are those that have taxable income in Minnesota over $150,000 if they're a married filing joint couple, and over $85,000 if they're a single individual.

Crann: So given that, is it possible to say how much income we're talking about to generate that taxable income number of $85,000 or $150,000?

Schaffer: It's honestly pretty tough to figure that out without looking at the specific situation, but there are some assumptions that we can make pretty easily.

The tax increase comes in two segments. First is an increase to a fourth bracket in Minnesota. Right now the most that a Minnesotan as an individual can pay as a percentage of their income is 7.85 percent. Under Gov. Dayton's proposal, there'll be a fourth bracket added above that at 10.95 percent, which is quite a jump, and that would apply to any dollar over $150,000 if you're married filing joint or any dollar over $85,000 if you're a single filer. So, your income up to those levels is taxed at the below brackets ...

Crann: And we should say we're talking here about taxable income again.

Schaffer: Yes ... so I would say if you've got W-2s of over $100,000 each as a married filing joint couple or over $120,000 or so as an individual, depending upon your deductions, you could be looking at paying some increased tax.

Crann: When you hear people who are opposed to a tax increase on higher earners, they often talk about small business owners and how this might affect them. What are we talking about there? Do small businesses generally pay tax as a company, as a corporation? Or do the owners pay it through their income tax?

Schaffer: It used to be that the majority of businesses paid their own income tax and it was kept completely separate from the owners. In the last 15 years or so, there's been an explosion of things called pass-through entities, partnerships, S corporations, LLCs, that do not pay tax as a business.

They take whatever the income is at the end of the year and pass that out or pass it through to the individual owners. And each owner, based on their percentage of ownership, picks up a percentage of business' income and pays taxes on the business' income on the individual tax form and at the individual rates.

It can be advantageous because corporate tax rates can be somewhat high and generally speaking individual income tax rates are lower, so there is usually an advantage there.

Crann: This 10.95 percent number on the highest tax bracket, how does that compare to corporate taxes?

Schaffer: Corporate taxes on the federal level start at 15 percent. So even there on the federal level, which we have to take into account as well, you're paying more than you would be on the Minnesota side. That's true as of this point.

If you have significant income that puts you into an income bracket where you have more than half a million dollars of taxable income under Gov. Dayton's proposal, then you get hit with a three percent surtax. So now you're looking at closer to 14 percent on a certain number of dollars on the Minnesota return.

Crann: ... When would (the surtax) kick in and how much are we talking about in percentage?

Schaffer: At this point, the proposal is for it to kick in for the 2011 and 2012 tax years, so the tax year we're in now and the tax year that will begin next year. It is a three percent surtax. If you have taxable income in Minnesota of more than half a million dollars, you will pay an additional three percent on every dollar above half a million on up to whatever your taxable income is.

It's scheduled to last only the two years and then to expire. As we've seen on the federal level, it's very hard for things to go away once they've come about, which is why we've seen very many extender acts on the federal level. So it'll be yet to be seen whether this actually does expire after two years as the governor has proposed it.